The Hartford 2007 Annual Report Download - page 219

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-42
4. Investments and Derivative Instruments (continued)
The following table summarizes the derivative instruments used by the Company and the primary hedging strategies to which they
relate. Derivatives in the Company’ s separate accounts are not included because the associated gains and losses accrue directly to
policyholders. The notional value of derivative contracts represents the basis upon which pay or receive amounts are calculated and are
not reflective of credit risk. The fair value amounts of derivative assets and liabilities are presented on a net basis as of December 31,
2007 and 2006. The total ineffectiveness of all cash-flow, fair-value and net investment hedges and total change in value of other
derivative-based strategies which do not qualify for hedge accounting treatment, including periodic derivative net coupon settlements,
are presented below on an after-tax basis for the years ended December 31, 2007 and 2006.
Notional Amount Fair Value
Hedge
Ineffectiveness,
After-tax
Hedging Strategy 2007 2006 2007 2006 2007 2006
Cash-Flow Hedges
Interest rate swaps
Interest rate swaps are primarily used to convert interest receipts on floating-
rate fixed maturity securities to fixed rates. These derivatives are
predominantly used to better match cash receipts from assets with cash
disbursements required to fund liabilities.
The Company also enters into forward starting swap agreements to hedge the
interest rate exposure of anticipated future cash flows on floating-rate fixed
maturity securities due to changes in the benchmark interest rate, London-
Interbank Offered Rate (“LIBOR”). These derivatives were structured to
hedge interest rate risk inherent in the assumptions used to price primarily
certain liabilities.
Interest rate swaps are also used to hedge a portion of the Company’ s
floating-rate guaranteed investment contracts. These derivatives convert the
floating-rate guaranteed investment contract payments to a fixed rate to better
match the cash receipts earned from the supporting investment portfolio. $ 5,049 $ 6,093 $ 113 $ (22) $
2 $ (9)
Foreign currency swaps
Foreign currency swaps are used to convert foreign denominated cash flows
associated with certain foreign denominated fixed maturity investments to
U.S. dollars. The foreign fixed maturities are primarily denominated in euros
and are swapped to minimize cash flow fluctuations due to changes in
currency rates. In addition, foreign currency swaps are also used to convert
foreign denominated cash flows associated with certain liability payments to
U.S. dollars in order to minimize cash flow fluctuations due to changes in
currency rates. 1,588
1,871 (318) (370) (1)
(4)
Fair-Value Hedges
Interest rate swaps
Interest rate swaps are used to hedge the changes in fair value of certain fixed
rate liabilities and fixed maturity securities due to changes in the benchmark
interest rate, LIBOR. In addition, in 2006 the Company closed the hedge of
fixed rate debt. 4,226 3,846
(66) 10 — (1)
Foreign currency swaps
Foreign currency swaps are used to hedge the changes in fair value of certain
foreign denominated fixed rate liabilities due to changes in foreign currency
rates. 696 492
25 (9)
— —
Total cash-flow and fair-value hedges $ 11,559 $ 12,302 $ (246) $ (391) $ 1 $ (14)